Further reforms needed to sustain Korean growth and social cohesion

26/04/2012 - Korea recovered faster and more vigorously from the global crisis than most OECD countries, but strong economic growth alone will not be enough to address the fundamental challenges posed by its rapidly ageing population and rising inequality, according to the OECD’s latest Economic Survey of Korea.

The report, presented today in Seoul by OECD Secretary-General Angel Gurría and Korean Minister of Strategy and Finance Jae-Wan Bahk, notes Korea’s current resilience, despite the continuing global slowdown. The OECD projects Korean economic growth in 2012 of around 3 ½ percent, and expresses confidence that the government has sufficient fiscal and monetary policy space to respond to any further deterioration in the global outlook.

“Korea is one of the most dynamic economies in the world, with low levels of unemployment and solid public finances that place it near the top of the class in the OECD,” Mr Gurría said. “The fundamental challenge today is designing policies to cope with its ageing population, which will be the second-oldest in the OECD by 2050, while bringing down income inequality and relative poverty, which have been rising for the past 15 years. Economic growth by itself will not be enough to achieve social cohesion.” (read the full speech).

The OECD identifies three priorities for meeting these long-term challenges.

First, Korea needs to make better use of its labour force, notably by increasing participation rates of prime working age women (25-54 years old), which is the third lowest in the OECD. This will require labour market reforms, an increase in affordable, high-quality childcare and making workplaces more family-friendly. Korea also needs more flexible wage and employment systems, which would also help make better use of older workers, who tend to leave firms by age 55.

Second, Korea has extensive scope to increase labour productivity, which is only about half the level seen in the most advanced OECD countries. Educational reforms, in particular to upgrade the quality of pre-primary education and universities, would help boost productivity. The scope for gains is largest in the service sector, which needs to become a second engine of growth alongside manufacturing.

Third, implementation of Korea’s Green Growth strategy will allow the country to transform its energy-intensive economy and create new sustainable sources of long-term growth. The priority should be prompt introduction of market-based instruments – such as an emissions trading scheme and a carbon tax on small emitters – to encourage green innovation and help Korea achieve its 2020 objective of reducing greenhouse gas emissions by 30%.

The OECD highlights a number of policies to combat rising inequality and relative poverty while promoting social cohesion. Korea should reduce the large share of workers on non-regular contracts, which cover about one-third of all employees, who earn much less and receive less coverage from the social insurance system than those on regular contracts.

Education reforms are needed to promote inclusive growth, while well-targeted increases in social spending are also appropriate, the report says. Korea should move cautiously, however, when introducing new social welfare programmes, in order to maintain its strong government fiscal position, the OECD said. Any additional social spending should be financed by higher taxes, such as VAT increases and environment-related taxes.

Further information on the Economic Survey of Korea, is available at: www.oecd.org/eco/surveys/korea. You are invited to include this Internet link in coverage.